Objective of financial statements
The objective of general purpose financial statements is to
provide information about the financial position, financial performance, and
cash flows of an entity that is useful to a wide range of users in making
economic decisions. To meet that objective, financial statements provide information
about an entity's: [IAS 1.9]
- assets
- liabilities
- equity
- income and expenses, including gains and losses
- contributions by and distributions to owners
- cash flows
That information, along with other information in the notes,
assists users of financial statements in predicting the entity's future cash
flows and, in particular, their timing and certainty.
Components of financial statements
A complete set of financial statements should include: [IAS
1.10]
- a statement of financial position (balance sheet) at the end of the period
- a statement of profit or loss and other comprehensive income (statement of comprehensive income for the period)
- a statement of changes in equity for the period
- a statement of cash flows for the period
- notes, comprising a summary of accounting policies and other explanatory notes
When an entity applies an accounting policy retrospectively
or makes a retrospective restatement of items in its financial statements, or
when it reclassifies items in its financial statements, it must also present a
statement of financial position (balance sheet) as at the beginning of the
earliest comparative period.
Definitions:
An asset
is defined as:
•
a
resource controlled by the entity
•
as
a result of a past event
•
from
which future economic benefits are expected to flow to the entity.
An asset
is recognized when:
•
it
is probable that any future economic benefit associated with the item
will flow to the entity; and
•
the
item has a cost or value that can be measured with reliability.
A liability is defined as a:
•
present
obligation
•
arising
from a past event
•
the
settlement of which is expected to lead to an outflow of future economic
benefits from the entity
A
liability is recognized when:
•
it
is probable that any future economic benefit associated with the item
will flow from the entity; and
•
the
item has a value that can be measured with reliability.
Equity interest
Equity interest is the residual amount found by deducting
all liabilities of the equity form all the entity's assets.
Income is defined as:
·
an increase in economic benefits during the
accounting period in the form of inflows or enhancements of assets or decrease
in liabilities
·
transactions that result in increase in equity,
other than those relating to contribution from equity participants.
Income is recognized
when:
·
an increase in future economic benefits arises
from an increase in an asset (or a reduce in liability), and
·
the change can be measured reliably
Expense is defined
as:
·
decrease in economic benefits during the
accounting period in the form of outflows or depletion of assets or
incurrence of liabilities
·
transactions that result in decrease in equity,
other than those relating to distributions to equity participants.
Expense is recognized
when:
·
an decrease in future economic benefits arises
from a decrease in an asset (or an increase in liability), and
·
the change can be measured reliably
Understanding these
definitions help simplify complex accounting scenario.
